IRS Focus for Audits is Income-Based—in the Wrong Direction

One of the true ironies of this world is that the federal government’s tax specialists have a greater interest in ferreting out fraud and error in the returns of low-income filers than in those of the wealthy, blessed as they are with legal loophole locators. Counterintuitive and costly, the IRS’ unbalanced auditing practice aims its efforts at low-income people, where there is the least to recoup. And that, according to a study released last month, creates an effective disincentive to make use of the Earned Income Tax Credit (EITC).

The study shows EITC taxpayers audited are not only less likely to file for EITC in future years, but less likely to file taxes at all. And according to the study, a full 80 percent of the EITC filers who are disqualified for the tax credit are disqualified not because they have been found to be at fault, but because of non-response, inadequate response, or undelivered mail.

These “correspondence audits” are, for the IRS, relatively easy pickings and, the IRS argues, they just don’t have the funds to use for audits of the well-off.

According to ProPublica’s multi-year review of IRS data, “Millionaires in 2018 were about 80 percent less likely to be audited than they were in 2011. But poor taxpayers continue to bear the brunt of the IRS’s remaining force.” In fact, the only group to be audited at the rate of very-low-income filers were the topmost one percent of filers, according to the most recent report from the IRS in 2018. This update follows a thorough auditing of practices last year by the investigatory group.

ProPublica reports that two central themes of a national policy shaped by conservative and Republican legislators and policymakers have come together to bring this upside-down result.

Efforts to shrink the size of the federal government have taken their toll on the IRS. Despite the number of returns being filed growing annually, the IRS’s budget has seen double-digit reductions, resulting in a shrinking workforce. Technology makes it easier to review the relatively simple returns of lower-income filers and to conduct “paper audits,” which require a filer to produce backup paperwork to verify their filings. High-income returns are more complex and require skilled personnel to conduct an audit. With this staff less available each year, this means fewer audits of the wealthy.

Republican lawmakers also work from a frame that says those who get public benefits are likely “cheaters” who need to be closely monitored to prevent them from taking advantage of the system. They have pressed the IRS to focus on those claiming the Earned Income Tax Credit (EITC), which provides direct aid to low-income working households and is generally viewed as a successful anti-poverty program. This has led to as many as 600,000 audits of EITC recipients per year.

As ProPublica notes, “The IRS estimates that there was about $18 billion in incorrect [EITC] claims in 2018. In most contexts, $18 billion is a big number, but when compared with the full scope of unpaid taxes, which likely total more than $600 billion each year, it’s not so big.” This misplaced priority does more than leave funds due to the federal government unpaid; it actively discourages those who are entitled to refunds and benefits from claiming them. Under current law, the IRS can withhold a refund and EITC payment until it completes its review of a filer’s return. The letter notifying individuals that they are being audited and the demand of for extensive documentation can be overwhelming:

The audits have a long-term impact on the lives of those who go through them, the study found…most end without the taxpayer responding at all, and the poorer the audit target, the more likely that is to happen. Those with wage income under $10,000 per year, for instance, didn’t respond at all in 64 percent of the EITC audits. For those with income over $40,000 per year, that rate dipped to 35 percent….In the years after they were audited, wage earners were 68 percent less likely to claim the credit compared with similar taxpayers who had not been audited. They were even 14 percent less likely to file taxes at all.

Funds intended for those in need to meet basic life expenses are lost to misplaced priorities and overly complex systems.

The result is a tax system that treats the wealthy differently from the rest of the nation. “While the wealthy now have an open invitation to cheat, low-income taxpayers are receiving heightened scrutiny because they can be audited far more easily. All it takes is a letter instead of a team of investigators and lawyers,” said Sen. Ron Wyden (D-OR), the ranking member of the Senate Finance Committee. “We have two tax systems in this country,” he said, “and nothing illustrates that better than the IRS ignoring wealthy tax cheats while penalizing low-income workers over small mistakes.”—Martin Levine

About The Author

Martin Levine is a Principal at Levine Partners LLP, a consulting group focusing on organizational change and improvement, realigning service system to allow them to be more responsive and effective.Prior to forming Levine Partners, Mr. Levine served the CEO of JCC Chicago creating a purpose driven organization, continuously realigning service and management systems to responsively and effectively fulfill JCC Chicago’s mission.Over the past 35 years Mr. Levine made major contributions to the transformation of JCC Chicago to its present position as a pre-eminent JCC in North America. Mr. Levine focused on strengthening the JCC’s effectiveness as a Jewish Community Building and Jewish Educational organization dedicated to “Bringing Jewish Values to Life” in all aspects of JCC programs and services.Mr. Levine was been responsible for the development of new facilities as part of JCC Chicago’s response to the changing demography of the Metropolitan Jewish Community. In addition, Mr. Levine had responsibility for guiding the Chicago JCC’s integration of its service and business strategies into a holistic approach.In addition to his JCC responsibilities, Mr. Levine served as a consultant on organizational change and improvement to school districts and community organizations.Mr. Levine has published several articles on change and has presented at numerous conferences on this subject.Mr. Levine held membership in many professional organizations including the Association of Jewish Center Professionals (Board member), Association for the Advancement of Social Work with Groups, Association for Quality and Participation, and the Future Search Alliance.A native of New York City, Mr. Levine is a graduate of City College of New York (BS in Biology) and Columbia University (MSW). He has trained with the Future Search and the Deming Institute.Mr. Levine served as President of the Gan Project, an organization committed to engaging communities in locally and ethically produced food.